ITAT Bangalore deletes ad hoc disallowance on coffee curing and agricultural expenses: key findings for business and agricultural assessee

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) in Aslam Parveez Vs CIT has categorically held that business and agricultural expenses which are backed by proper documentary evidence cannot be rejected or curtailed on an ad hoc basis. The decision is significant for assessee involved in agro-based trading and processing activities, particularly where processing is carried out through job-work arrangements.

In this appeal concerning Assessment Year 2020-21, the ITAT deleted two major disallowances aggregating to ₹99,24,895:

  • Disallowance of hulling/curing (processing) charges of ₹88,00,966 claimed under Section 37(1)
  • Ad hoc disallowance of 25% of agricultural expenses, resulting in an addition of ₹11,23,929

The Tribunal emphasised that once the assessee furnishes ledgers, invoices, vouchers, bank statements and other primary evidence establishing that expenditure is incurred wholly and exclusively for business or agricultural operations, the Assessing Officer (AO) cannot sustain additions merely on doubt or assumptions.

Background of the dispute

Parties and assessment details

  • The appeal, ITA No. 204/Bang/2026, was filed by Shri Aslam Parveez, proprietor of Chikmagalur Coffee Agencies.
  • The challenge was directed against the order dated 26 December 2025 passed by the National Faceless Appeal Centre (NFAC) for **AY 2020-21`.
  • The original assessment was framed under Section 143(3) of the Income Tax Act 1961 on **22 September 2022`.

The assessee, an individual engaged in the business of coffee trading and in agricultural activities, had:

  • Filed return of income on 16 January 2021 declaring total income of ₹29,03,790.
  • The AO completed assessment determining total income at ₹1,28,91,490, after making total additions of ₹99,87,700.

The additions primarily comprised:

  1. Disallowance of hulling/curing charges (job-work processing) of ₹88,00,966.
  2. Disallowance of 25% of agricultural expenses, originally at ₹47,46,934, finally leading to an addition of ₹11,23,929 (after some relief by NFAC).

The assessee obtained partial relief before the CIT(A)/NFAC and therefore approached the ITAT for further adjudication.

Nature of assessee’s activities

Coffee trading and processing operations

The assessee was carrying on the business of trading in coffee through Chikmagalur Coffee Agencies. The business model, as explained before the appellate authorities, involved:

  • Purchase of raw coffee beans from planters and growers.
  • Getting such beans processed into marketable coffee through various stages:
    • Dehusking
    • Cleaning
    • Hulling
    • Grading
  • Sale of the processed coffee to buyers in the domestic market and/or export houses.

Crucially, the assessee did not own any curing/hulling facility. Hence, the entire processing work was undertaken on a job-work basis through outside parties, for which the assessee incurred and claimed hulling/curing charges debited in the Profit & Loss account.

The AO accepted that the assessee owned around 122 acres of agricultural land. On that basis, the existence of agricultural income was not questioned. However, the AO doubted the correctness and quantum of agricultural expenses claimed in the books.

The agricultural expenditure comprised, inter alia:

  • Diesel consumption
  • Fertilisers and pesticides
  • Labour charges
  • Transportation costs
  • Interest on agricultural loans
  • Other farm-related outgoings

The AO, being dissatisfied with the explanations and documentation at assessment stage, proceeded to disallow 25% of the total agricultural expenses on an estimated basis.

Disallowance of hulling/curing charges under Section 37(1)

AO’s reasoning

During the course of scrutiny, the AO observed: